Articles

Fund managers under pressure: Rationale and determinants of secondary buyouts

S. ARCOT, Z. FLUCK, J.-M. GASPAR, U. HEGE

Journal of Financial Economics

January 2015, vol. 115, n°1, pp.102-135

Departments: Finance

Keywords: Leveraged buyouts, Secondary buyouts, Private equity, Limited investment horizon, Agency conflicts in fund management

http://dx.doi.org/10.2139/ssrn.2332801


The fastest growing segment of private equity (PE) deals is secondary buyouts (SBOs)—sales from one PE fund to another. Using a comprehensive sample of leveraged buyouts, we investigate whether SBOs are value-maximizing, or reflect opportunistic behavior. To proxy for adverse incentives, we develop buy and sell pressure indexes based on how close PE funds are to the end of their investment period or lifetime, their unused capital, reputation, deal activity, and fundraising frequency. We report that funds under pressure engage more in SBOs. Pressured buyers pay higher multiples, use less leverage, and syndicate less suggesting that their motive is to spend equity. Pressured sellers exit at lower multiples and have shorter holding periods. When pressured counterparties meet, deal multiples depend on differential bargaining power. Moreover, funds that invested under pressure underperform


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